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Amidst global attention on peak oil demand, India appears to be bucking the trend. The country's oil demand is expected to grow by 3.5 million barrels per day (b/d) from 2017 to 2035, accounting for one-third of global oil demand growth. India's demand is driven by rising income levels, an expanding middle class and a growing need for mobility.

However, with only 400,000 b/d of firm refinery capacity addition out to 2023, refinery supply will fail to keep up with demand growth.

Sushant Gupta, research director, Wood Mackenzie said: "From a balanced position today, Indian public sector undertakings (PSUs) or refineries owned by national oil companies will become short on transport fuels at least until the 1.2 million b/d mega refinery, a proposed joint venture among Indian PSUs, Saudi Aramco and ADNOC, comes online.

"So how much and how soon is the new refinery capacity needed in India? This depends on two main factors. First, the pace of oil demand growth and second whether private refiners would divert their large export volumes to the domestic market.

"We think the most likely situation is that India would need between 3.2 million b/d and 4.7 million b/d of new capacity out to 2035 to remain self-sufficient in transport fuels. So we are talking about a future capacity which is 1.7 to 2.0 times the current. This is clearly an uphill task, unless domestic refiners can commit to their planned capacity additions."

Wood Mackenzie views uncertainties around oil demand as the biggest risk to new refinery projects. Factors such as GDP growth, road infrastructure developments, electrification of the transport sector and fuel efficiency improvements, could have very different implications for oil demand.

For instance, a high demand scenario paired with no increase in private refiners supply to India could lead to substantial under-capacity, whereas a low demand scenario coupled with high diversion of private refiners' exports to India would lead to over-capacity.

The other challenge is around choosing the right refinery configuration. New capacity in India needs to focus on increasing gasoline yields as gasoline to diesel demand ratio is expected to rise. Current refinery yields are highly weighted towards diesel.

However, as the world faces global surplus of gasoline in the longer term, Indian refiners will have to seriously consider their new capacity project strategies. A high gasoline yield configuration required to align with domestic demand will result in sub-standard returns for investors that could impact the pace of future refinery capacity additions.

An alternative is to import products, particularly gasoline. Wood Mackenzie expects the US and Europe to have a surplus of gasoline due to domestic demand declines. This could create a match between US/Europe and India for a long-term gasoline trade. However, a long-haul trade will take time to establish credibility, with concerns around security of supply.

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Summary

We forecast India to be the largest oil demand growth centre by 2035, surpassing China’s demand growth by 2024. A number of refining projects – about 4.6 million b/d capacity – are planned by Indian refiners. Will this be enough or will it lead to overcapacity? Technological, economic and regulatory factors are evolving, and can have implications for oil demand. We present demand and supply scenarios – what can lead to over- or undercapacity? This analysis will enable more informed decision-making and planning for new refining capacity additions by domestic private and public sector refiners.

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